The unkindest cut: the BoE got it wrong

Below is a link to an article I wrote about the Bank of England’s aggressive 1.5% interest rate cut that appeared in yesterday’s Guardian newspaper.

The unkindest cut, GuardianThe long and short of it is that I am very skeptical about the need for such a large cut. Many pundits felt the BoE was behind the curve and needed to send a large signal. One such figure is Willem Buiter, a former BoE Monetary Policy Committee member. However, to my mind, the move has the faint whiff of panic to it.

Moreover, while interest rate policy can be beneficial in stimulating demand, it is a blunt instrument, carrying large unintended consequences. Just ask Alan Greenspan. If the UK authorities want to stimulate demand, a smaller cut coupled with increased government spending on infrastructure is preferable to such a massive move.

The ECB demonstrated again that it is more cautious and more prudent by only moving 50 basis points on the same day.

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty five years of business experience. He has also been a regular economic and financial commentator in print and on television for the past decade. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College.

Negative real interest rates are just about the most distortionary and damaging thing a central bank can foist upon a capitalist economy. It erodes the incentive to save, distorts bank balance sheets, and invariably leads to inflation.

hortonheardawho says 11 years ago

I would guess that the interest rate cut was to facilitate the rollover of existing debt. The alternative is a large number of defaults and a collapse of the house of cards.